A closer look at what the recent Macy’s portfolio adjustment announcements mean and what’s next for big-box retailers

Upon first glance, Macy’s early January portfolio adjustment announcements appear to be a standard annual strategic repositioning. However, there has been a disproportionate share of coverage and discussion surrounding the well-known retailer’s store closings.

To figure out if this scrutiny is representative of a net negative for the iconic department store brand, or simply business as usual, Macy’s decision must be analyzed. Taking a closer look at the smallest store scheduled to be shuttered, a 75,000-sq.-ft. Macy’s in Belmont, Mass., and the largest, a 791,000-sq.-ft. location in Houston, Texas, provides some insight into the dynamics behind Macy’s decision-making process.

Belmont
Identifying the reason for closing the undersized Macy’s in the small community of Belmont, Mass., isn’t difficult. Occupying a site that has been a department store for nearly three quarters of a century, this freestanding Macy’s is a fish out of water. Belmont’s three-block main drag is surrounded by coffee shops and mom-and-pop operations – clearly a poor fit for a major retailer. With extremely limited access to parking, tight zoning restrictions and in a location less than five miles from one of Massachusetts’ best-performing malls, it is unlikely that this Macy’s will be replaced by another department store. Instead, a tear-down or renovation/rebuild seems more likely, as commercial office space or some kind of residential-over-retail component would be a better fit for this location.

Houston
Since the 1980s, Houston has seen dramatic changes, including skyrocketing land values inside the area commonly referred to as ‘The Loop.’ The nearly 800,000-sq.-ft. Macy’s located here, formerly the iconic Foley’s, became a retail dinosaur amidst the newer customary downtown retail consisting of coffee shops, book stores, fast food shops, etc. That it has lasted as an oversized store in an urban environment is actually a great indication that the Macy’s brand is appreciated and doing well. A similar fate as Belmont’s seems likely for this site, with multi-level office being a good bet.

The big picture
Taking a closer look at the Belmont and Houston examples, Macy’s store closings appear to be strategic business decisions that some might even argue were long overdue. This is the kind of ongoing and analytical performance and portfolio evaluation that every successful retailer needs to do. It is tough to say whether or not this particular move is a result of the pressures exerted by the recent recession, but it’s clear that Macy’s has embraced a proactive big-picture strategy for some time now.

It’s also worth noting in this analysis that while six stores are slated to close this spring, Macy’s also announced that nine new locations will open in 2013 and 2014. Among those new stores none of them exceed 180,000 sq. ft., a large departure from the 791,000-sq.-ft. Macy’s store in Houston. It will be interesting to follow Macy’s openings and closings in the future to see if this is a pattern that continues. If so, it may herald the discussion of an ongoing trend in which big box retailers begin looking more closely at how they can reduce their overall footprints in an effort to reduce occupancy costs and avoid over-merchandising.

Identifying and closing underperformers while opening stores in promising new markets is not a bad thing for any market; it’s really just about moving forward. The markets themselves will benefit from a better fit, and weeding out less than ideal locations will strengthen the brand. Considering Macy’s willingness and ability to make these types of tough decisions and to continue to evolve and grow as a company, it wouldn’t be surprising if there were more closing announcements in the not-too-distant future.

Ultimately, the debate over whether the most important piece of this announcement is Macy’s closing stores or opening them might be irrelevant: it may just be that Macy’s has come to appreciate the fact that less is more, and has found that pursuing a more sophisticated portfolio strategy of value engineering is in their best interest.

Jonathan Lapat is an X Team International partner and principal of Strategic Retail Advisors in Framingham, Mass. Jonathan focuses on tenant representation throughout New England, upstate New York and the mid-Atlantic.

Jason Baker is an X Team International partner and co-founder and principal of retail real estate brokerage firm Baker Katz in Houston, Texas. Regarded as one of Houston’s most professional and knowledgeable retail brokers with more than 15 years of experience, Baker has served some of the nation’s top retail brands.

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